Obvious prospects for physical growth in a business do not translate into obvious profits for investors. — Benjamin Graham, The Intelligent Investor
Ending months of speculation, Wendy’s (NYSE: WEN) announced its plans to offer part of its Tim Horton’s in an IPO. Tim Horton’s is enormously profitable, earning $247 million (US) on revenue of about $1 billion. The chain has grown revenue by an average of 14% and profits by 21% annually over the past five years. Same store sales rose by an average of 7% over the same time period. The company also has significant growth opportunities in Western Canada and Quebec and is just starting to expand into the United States.
While Tim Horton’s is a great franchise, I am not sure it will be a good investment at any price. The iconic status of the doughnut shop in Canada and its strong profitability are likely to generate strong interest from investors. The size of the offering is also small compared to the potential demand, all of which add up to the shares likely being fully valued. In a few year’s time, when the honeymoon is over and Tim Horton’s makes a misstep or two (say in trying to expand too fast in the US), a nice opportunity to buy some shares will present itself. Till then, I will just be waiting patiently, enjoying my honey crullers with double-double coffees.
